On January 1, 2018, Red, Inc. borrowed cash by issuing a $500,000, 5-year note that specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at maturity. If the note had instead been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2018, which of the following would be true?

Question

Quizplus · Accepted Answer

Because the note is reduced each year in an installment note, interest expense is the effective rate times a reduced amount each year. When a note is paid at maturity instead, the interest is the same each year.